How to Avoid the Carbon Bubble: Divest from Fossil Fuels

How’s this for a new year’s resolution, Trent? Let’s become the first university in Canada to divest from the fossil fuel industry.

If you aren’t convinced yet, you may not know about a major economic risk associated with fossil fuel investments: the carbon bubble.

In 2009, governments from around the world gathered in Copenhagen for the annual climate conference put on by the United Nations. These meetings are put on so that governments can discuss strategies and goals to address climate change. The conference in Copenhagen was particularly hyped as it took place during a time when public concern and media coverage of climate change was very high, so expectations of the event were significant.

Unfortunately, but unsurprisingly, our leaders failed to produce any meaningful plan from Copenhagen that would drastically reduce carbon emissions. However, there was one thing of significance that came out of Copenhagen: the Copenhagen Accord.

The Copenhagen Accord is a document that outlines the dangers and science behind global warming, and states that “global temperatures should be below two degrees Celsius” and “deep cuts in global emissions are required” to keep the temperature below that level.

In total, 167 countries, responsible for more than 87 percent of the world’s carbon emissions, signed on to the Accord, including big polluters like the United States and China. The document is purely voluntary and doesn’t hold countries legally accountable for their signatures, but to this day, it is the only thing about climate change that the world’s politicians have almost unanimously agreed to.

In March 2012, a group of financial analysts at the Carbon Tracker Initiative published a report showing that 80 percent of fossil fuel reserves owned by the 200 largest fossil fuel companies must be kept in the ground to avoid a temperature rise of two degrees Celsius. Their report is supported by organizations such as HSBC, Citi, Standard and Poor’s, the Bank of England, and the International Energy Agency.

There is a problem that arises with this report, and not just the obvious environmental issue. While the fossil fuel reserves described in the report are physically in the ground for now, economically, they are already above-ground; they are figured into share prices, and companies are borrowing money against these vast assets.

This explains why fossil fuel companies have done everything in their power to effectively prevent any significant political action on climate change.

Fossil fuel reserves are the industry’s primary asset, the holding that gives them their value. The reserves they own are worth an estimated $27 trillion, so keeping 80 percent of reserves in the ground would mean writing off around $20 trillion in stranded assets. This is called the carbon bubble, and can be compared to the housing bubble of the late 2000s that tipped the world into a financial crisis.

There are two scenarios that could result from the carbon bubble.

First is the possibility that governments who signed the Copenhagen Accord will not do anything to stop fossil fuel companies from burning all of their reserves. This would mean investors will do fine, but that the planet we live on could see a temperature rise of four to six degrees Celsius in the next century, the effects of which would certainly be beyond disastrous.

The second possibility is that governments that signed the Copenhagen Accord pass legislation preventing fossil fuel companies from digging up all of their reserves, something many people are increasingly optimistic about happening, due to the increase in extreme weather events from climate change and the growing civil resistance to fossil fuel extraction.

If this were to happen, it would mean we might have a decent chance of keeping warming below 2 degrees Celsius and avoiding the worst impacts of climate change. However, this would also mean fossil fuel companies are currently overvalued, and institutions with money invested in the fossil fuel industry, like Trent, are at risk to this market inflation.

The question is then: which scenario do we want to work towards at our school? We could continue with business as usual and continue investing in fossil fuels through our endowment and pension funds. By doing so, we would leave ourselves, as students, without much of a planet upon which to pursue our degrees, and also expose ourselves to the financial risk of the carbon bubble in the case that governments got serious about climate change.

Or, we could decide to change our business strategy and shift our investments to renewable energy.

This way, we would be making a good return on investments while supporting the industry that will help us avoid a 2 degrees Celsius temperature rise, and we would be making a statement to governments that we are serious about the financial risk of the carbon bubble and expect them to fulfill the commitments they made in Copenhagen.

On January 31, Sustainable Trent will be presenting our proposal for fossil fuel divestment to the Board of Governors. The board will then have until their next meeting in March to come up with a response. Hopefully they will decide to act in the best interest of students and choose to be on the right side of history.

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